Tennessee Cable Television Ass'n v. Tennessee Public Service Com'n

• Decision Date: 02 July 1992
• Citation: 844 S.W.2d 151
• Parties: Util. L. Rep. P 26,230 TENNESSEE CABLE TELEVISION ASSOCIATION, et al., Petitioners, v. TENNESSEE PUBLIC SERVICE COMMISSION, et al., Respondents.
• Court: Tennessee Court of Appeals

Page 151

844 S.W.2d 151

Util. L. Rep. P 26,230

TENNESSEE CABLE TELEVISION ASSOCIATION, et al., Petitioners, v. TENNESSEE PUBLIC SERVICE COMMISSION, et al., Respondents.

Court of Appeals of Tennessee Middle Section, at Nashville.

July 2, 1992.

On Rehearing July 24, 1992.

Permission to Appeal Denied

by Supreme Court

Dec. 7, 1992.

William B. Hubbard, Weed, Hubbard & Berry, Nashville, John D. Sevier, Cole, Raywid & Braverman, Washington, DC, for Tennessee Cable Television Ass'n.

Henry Walker, TN Public Service Com'n, Nashville, for Tennessee Public Service Com'n.

Jay R. Gentry Ortiz, Atlanta, GA, Valerius Sanford, Gullett, Sanford, Robinson & Martin, Nashville, for AT & T Communications of the South Central States, Inc.

OPINION

KOCH, Judge.

This appeal involves the Tennessee Public Service Commission's decision to require South Central Bell Telephone Company to accelerate the modernization of its network using projected excess earnings. Three associations representing commercial and residential telephone customers filed Tenn.R.App.P. 12 petitions for review, asserting that the Commission should have ordered South Central Bell to refund its excess earnings rather than to spend them to implement a modernization plan that the Commission had not yet properly adopted. While the Commission's authority over excess earnings is not limited to refunds or rate reductions, we have determined that the Commission acted arbitrarily and abused its discretion in this case. Accordingly, we vacate the portion of the Commission's order requiring South Central Bell to spend $111.5 million to implement new technologies in accordance with modernization plans that have yet to be adopted.

I.

The 1980's brought major technological changes and significant federal regulatory reform to the telecommunications industry. The Tennessee Public Service Commission ("Commission"), having regulatory authority over the telephone companies in this state, decided that it should respond to these changes. This case involves the process embarked upon by the Commission to become the "catalyst in shaping and overseeing the technology deployment plans of the [telecommunications] industry."

In October 1988, the Commission appointed a task force to study alternative methods for regulating the telephone companies under its jurisdiction. The task force included members of the Commission's staff and five representatives of Tennessee's telecommunications companies, including South Central Bell Telephone Company ("South Central Bell"). Approximately one year later, the Commission also retained a consultant to develop a ten-year strategy for modernizing Tennessee's telephone network. The work of the consultant and the deliberations of the task force proceeded concurrently, and their recommendations were intended to be complementary and synergistic.

The task force issued its "Tennessee Regulatory Reform Plan" on July 10, 1990. The plan, embodying a compromise between the telecommunications industry and the Commission's staff, recommended that the Commission relax the regulation of non-basic monopoly services and provide telephone companies with financial incentives to operate more efficiently. It required Tennessee's two large local exchange companies ¹ to commit to a "ten-year blueprint for deploying technology to enhance the telecommunications infrastructure in Tennessee" and, in return, permitted them to distribute their projected excess earnings to their customers "in the form of accelerated technology deployment or rate reductions."

The consultant presented its final report on July 30, 1990. The report, entitled "Telecommunications Technology Deployment Analysis and Master Plan Development," recommended the adoption of a ten-year master plan for the deployment of digital switching and fiber optic transmission technologies in Tennessee's telephone network. It envisioned that the telephone companies would (1) deploy "intelligent network services" in the five urban counties by 1991 and in the rest of the state by 1993; (2) deploy "integrated services or digital networks" in urban areas by 1998 and in the rest of the state by 2000; and (3) offer "broadband" (fiber optic) capability in urban areas beginning in 1995, in suburban areas in 1997, and in rural areas in 1999. Broadband services would grow slowly under the plan, reaching 10% penetration in urban areas, 5% in the suburbs, and 2% in rural areas by 2000. The technology master plan anticipated that these improvements would be paid for with the excess earnings generated under the regulatory reform plan.

In addition to improving the telephone companies' ability to provide traditional telecommunications services, the improvements envisioned in the technology master plan would also enable the telephone companies to enter into new service delivery areas. Among the advanced services available through fiber optics technology would be the ability to transmit video signals over the telephone lines to consumers' homes.

The Commission considered both the regulatory reform plan and the technology master plan at its July 31, 1990 meeting. It approved both plans "subject to hearing and public comment" and directed its staff to distribute copies of the plan to the news media, local governmental officials, all local exchange and inter-exchange carriers, and other interested persons. The notice requested comments or requests for a hearing within thirty days.

Even before the Commission took final action on either the regulatory reform plan or the technology master plan, the Commission's staff began to implement both plans by negotiating with South Central Bell to determine the company's projected excess earnings between January 1, 1990 and December 31, 1993. When the staff and South Central Bell reached an impasse in their negotiations, ² the Commission entered an order on July 23, 1990, directing South Central Bell to show cause why it should not be required to reduce its earnings to a just and reasonable level. While the notice did not indicate how the Commission intended to distribute the excess earnings, all parties knew that the excess earnings would be used, at least in part, to modernize South Central Bell's network.

Tennessee's cable television companies viewed enabling the telephone companies to transmit video signals as a competitive threat. Accordingly, the Tennessee Cable Television Association ("TCTA"), a trade group representing forty-five cable television companies operating in Tennessee, mounted an all out assault on the regulatory reform plan and the technology master plan. The TCTA intervened in South Central Bell's earnings investigation and also requested permission to participate in the Commission's hearings with regard to the approval of the regulatory reform plan and the technology master plan. It asserted that its members would benefit from reductions in rates and access charges and that they would be harmed if South Central Bell were permitted to subsidize its entry into new "competitive ventures" using projected excess earnings from its telephone operations.

The Commission conducted a hearing on August 1, 1990 to resolve the impasse concerning the amount of South Central Bell's projected excess earnings. It determined that the company's excess earnings for the three-year period beginning on January 1, 1990 would be $157.3 million, ³ and on August 8, 1990, issued a public notice stating that it would hold a hearing on October 3, 1990 "to hear evidence and argument from the parties concerning the proper disposition of these excess revenues."

On September 28, 1990, the Commission entered an order concerning the amount of South Central Bell's excess earnings. Even though its hearing on the distribution of these earnings was still days away, the Commission decided that South Central Bell's excess earnings would be spent in five general areas, including $111.5 million "to implement the ten year, master plan for technology deployment ... approved by the Commission in Docket 90-06255, and such other modernization projects, such as video overlay, as the Commission directs." The Commission also directed South Central Bell to begin operating under the "incentive sharing plan" in the regulatory reform plan.

The Commission, in conjunction with Tennessee's telephone companies, also began the aggressive promotion of a state-wide series of technology conferences designed to introduce the technology master plan and the regulatory reform plan--now called "FYI Tennessee" to the public. Even though the Commission had not yet adopted or even held hearings on these plans, the Commission's literature stated that the purpose of the conferences was to provide a better understanding concerning "how all Tennesseans will benefit from new service capabilities."

On the eve of South Central Bell's earnings investigation hearing, the TCTA filed motions requesting each of the commissioners to recuse himself from South Central Bell's excess earnings investigation, asserting that they were biased in favor of South Central Bell's position with regard to the distribution of the excess earnings. The TCTA also filed petitions for declaratory orders questioning the propriety of deciding on the distribution of South Central Bell's excess earnings using either the regulatory reform plan or the technology master plan since the Commission had not yet formally promulgated either plan as a rule.

The commissioners denied the TCTA's recusal motions and proceeded with the October 3, 1990 hearing without acting on the TCTA's petitions for declaratory orders. On November 30, 1990, while its decision on the excess earnings was still pending, the Commission filed a formal notice of a rulemaking hearing concerning "the adoption of a four year experimental regulatory reform plan" and "the adoption of a ten year technology deployment plan which will become the blueprint for the modernization of the telephone network across the ...